Not-for-Profit vs Nonprofit: What is the difference?
Not-for-profit vs nonprofit organizations are often confused with one another. As you discover in this post, there are distinct differences between the two. Find out what sets them apart.
Difference between not-for-profit vs nonprofit
What is not-for-profit organization?
A not-for-profit can earn profits but cannot distribute the profits or accept donations.
Not-for-profits are membership organizations such as sports clubs or associations. Not-for-profits may have full-time employees whose salaries are paid first and the remaining revenue is re-invested in the organization. A not-for-profit exists primarily to serve its members, not the general public. It is supported by its memberships, dues, and assessments. These organizations are not required to pay federal income tax if they are classified as a 501(c)(7) organization.
What is a nonprofit organization?
A nonprofit can accept donations and funding. They are not required to pay federal income tax due to their nonprofit status.
Nonprofit organizations are registered with the IRS as 501(c)(3), which means they can not distribute any of their profits to members. Rather, nonprofit organizations must reinvest all funds in the betterment of their cause.
Nonprofit organizations are granted federal tax-exempt status, and donations made to these organizations are tax deductible for the donor. They operate in sectors such as social, education, healthcare, religious, public safety, educational and research purposes.
Nonprofit organizations are non-governmental, charitable or philanthropic enterprises. They provide services to both the public and private sector without regard for how much profit they make.
Not-for-profit vs nonprofit key differences
Not-for-profit
- Primary purpose of a not-for-profit is to serve its members.
- It is supported by membership fees, dues and assessments.
- Not for profit organizations are often established by members of a community.
- Not for Profit organizations do not earn profits. All the earned money is used to pursues the organization’s objectives.
Nonprofit
- The term nonprofit is usually applied in reference to not businesses but rather organizations that exist solely for the pursuit of a social goal.
- Nonprofit organizations are typically organized as public charities, foundations or trusts. Nonprofits can also be classified by their primary activity, such as health care (e.g., hospitals and clinics), social services (e.g., adoption agencies) or education (e.g., primary schools).
- Nonprofits must provide a public benefit to be considered exempt from paying income taxes.
Not-For-Profit vs Nonprofit IRS Classifications
What is a 501c7?
A 501c7 is a not-for-profit social or recreational club organization that meets IRS criteria for a tax-exempt status. A 501c7 does not have to be charitable organization. However, it must be categorized as a membership social or recreational and non-profitable. These organizations are funded by their members.
They are permitted to receive up to 35% of their gross receipts, including investment income, from sources outside its membership while retaining its tax-exempt status. It is important to note, 501c7 organizations can be subject to unrelated business taxable income. In these instances, they can be taxed on non-member income as well as investment income.
Examples:
- College social/academic fraternities and sororities
- Country clubs
- Sport clubs
- Dinner clubs that provide a meeting place library, and dining room for members
- Hobby clubs (such as a book club, chess club, gardening club, etc.)
- Homeowners or community associations whose primary function is to own and maintain recreational areas and facilities
What is a 501c3?
A 501c3 is a nonprofit organization that has been classified as public charity. The IRS categorizes these nonprofits as “charitable organizations.” These charities are eligible for many tax exemptions and deductions, including the ability to receive tax-deductible donations.
A 501c3 is classified as a charitable organization that has been recognized by the IRS under section 501(c)(3) of the Internal Revenue Code. This type of organization must spend their income on activities that fulfill their mission.
Bottom Line
In comparison, there are similarities between not-for-profit vs nonprofit organizations. The main similarity is both do not earn profits and are tax-exempt. In terms of interchangeability, a nonprofit can serve as a not-for-profit, but, a not-for-profit cannot serve as a nonprofit.
Want to read more? Check out these insightful articles:
- Hidden Gems About Accounting for Nonprofits Revealed
- Why Quickbooks Does Not Follow Nonprofit Accounting Guidelines
- Nonprofit vs For-Profit: Key Difference and Why It Matters
- Nonprofit Accounting Methods: Cash vs Accrual
- How to Get Your Nonprofit Board Members on Board
- Nonprofit Tax Exempt Status: What is the Criteria?
Did you find this article useful? We welcome your thoughts and comments.
Originally published at https://www.araize.com/not-for-profit-vs-nonprofit/